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The homeless $44b: Shareholders fall out of love with big banks

Patrick Commins

Analysts at UBS expect growth in bank earnings per share to slump to 4.6 per cent this financial year, after growing by an estimated 8.3 per cent over the 12 months to June 30. Photo: Chris Pearce

A cooling love affair with shares of the big four banks could free up $44 billion in investor capital, cash that will be looking for a new home over the coming months.

After an underwhelming August for bank share prices, questions are being raised about Australian investors' commitment to the Big Four, and analysts are beginning to place bets on where shareholders will look to put their money next.

The underperformance over the month was marginal – the ASX 200 bank sub-index fell 1 per cent over the month, against a 0.1 per cent drop in its parent index, on Bloomberg data.

But it was significant that a perennial favourite destination for yield-hungry shareholders lagged through an earnings season in which dividends held centre stage.

The absence of any big payout boost from the three banks providing earnings updates – Commonwealth Bank of Australia, Australia and New Zealand Banking Group and National Australia Bank – hurt share prices. It also intimated that dividend growth is likely to remain subdued.

Indeed, the best thing the big banks could have done was stay quiet. Shares in Westpac Banking Corporation, which has a September financial year end and doesn't provide quarterly updates, bucked the trend among its peers and added 1.2 per cent over August.

It didn't help that the earnings numbers from CBA, ANZ and NAB were underwhelming, highlighting to the market that while bank earnings remain strong, the outlook is less bright than it was a year ago.

Indeed, analysts at UBS expect growth in bank earnings per share to slump to 4.6 per cent this financial year, after growing by an estimated 8.3 per cent over the 12 months to June 30.

Complicating matters further are concerns that the Murray report will require banks to boost their capital reserves thus squeezing lenders' margins further.

Strategists at Morgan Stanley are among those pondering on where the cash once destined for the banks will flow. They calculate that if the broad consensus turned negative on the banks – as they have – it could result in a P/E de-rating of 1.5 points for the sector as a result of outflows alone.

That, in turn, "would require a new home to be found for some $44 billion of capital", the analysts wrote in a note to clients.

So where will the cash go?

A simple switch into resources is problematic in a time of falling commodity prices, writes Morgan Stanley, and would push valuations for that sector to unsustainable levels.

Instead, the analysts highlight three potentially attractive areas for investors.

First is non-bank financials, an area with less regulatory risk than the banks and more growth. The broker's analysts like money managers Magellan Group and Henderson Group, as well as insurers IAG and AMP.

Macquarie is in a "unique position", they write, to take advantage of a cyclical upswing in corporate activity, while the investment bank's "strong balance sheet lowers their risk profile and enables dividend flexibility".

The second focus is a group known as "global growers"; companies which "have built meaningful growth exposures in regions and economies that potentially offer greater growth prospects than here domestically".

Morgan Stanley's exposures include: Domino's Pizza, ALS Ltd, Sonic Healthcare, James Hardie, Bluescope Steel, Goodman Group, and CSL, while Henderson Group and Macquarie also should benefit from their global exposure.

The final group are the "structural growers" (as opposed to cyclical plays). They include the already mentioned Domino's Pizza and James Hardie, along with Origin Energy.